Post on 03-Apr-2018
Implementing Results-Based Budgeting
Ronnie Downes, OECD Results-Based Planning, Budgeting, Monitoring & Evaluation
Chengdu City, China 12-16 August 2013
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Implementing the Budget: Spending Money Implementing the budget entails two distinct but connected
activities: incurring expenditures and delivering services
SPENDING MONEY
Implementation is not simply a matter of executing the approved budget. In every country, the implemented budget varies from the one adopted
The variance between the approved and actual budgets depends on a country’s financial condition, the volatility of public revenues, the role of central institutions (president, cabinet, finance ministry) and the type of budget adopted
A highly itemized budget may experience greater variance because every change in a line item deviates from the budget
The contemporary trend in public management is to give service providers flexibility in implementing their budgets. But this trend may be more appropriate for highly developed countries than for developing countries
Financial management tools: end of year flexibility End-year flexibility (carry-over)
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Q.54 - Can ministers carry-over unused funds or appropriations from
one year to another?
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Implementing the Budget: Getting Results GETTING RESULTS
Implementing the budget also entails carrying out the activities and delivering the services financed by government
The more explicit the budget is in specifying activities and services, the greater the capacity to monitor implementation
Some variance, due to changing circumstances, may be appropriate, but not purposeful disregard of the government’s intentions
Robust monitoring is essential because service providers generally know more than central agencies about what they are doing (INFORMATION ASSYMETRY)
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Monitoring the Actual Expenditure of Funds Many developing countries have significant variances
between authorized and actual expenditures
Even when funds are spent on authorized purposes, they often do not reach intended users
For example, funds budgeted for rural schools may be spent on headquarter staff instead
These practices undermine budgeting and make it impossible to link resources and results
To counter these problems, governments can implement monitoring procedures that trace the flow of money from the budget to end users
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Types of Expenditure Control
Type of Control Exercised By
What is Controlled Mode of Accountability
EXTERNAL CONTROL
Finance Ministry and other central agencies
Specific inputs (individual items of expenditures, such as each position or purchase)
Compliance with line budget, civil service rules and other rules
INTERNAL CONTROL
Spending departments
Major expenditure items (total salaries, all equipment, or supplies, etc.)
Audit of systems to assure that internal controls meet government standards
MANAGERIAL ACCOUNTABILITY
Spending or responsibility units
Global operating budget and outputs
Reports and audits on outputs, costs, quality and other results
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The Shift from External Control to Internal Control
FROM TO
Expenditures itemized in the budget Classes of expenditures specified in the budget
Spending controlled by central agencies
Spending controlled by line departments
Pre-audit (before spending occurs) Post-audit (after spending has occurred)
Audit of individual transactions Audit of internal control systems
Audit of all transactions Sample transactions to test the system
Managers cannot be given flexibility Managers must have opportunity to improve performance
Rules enforced by outside monitors Rules are internalized and accepted as legitimate
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Budget execution in Greece in 2008
Extensive focus on ensuring the legality and propriety of expenditure
Very extensive use of ex ante control Execution involves a large number of actors which
confuses responsibility Reallocation very time consuming (6,650
transactions in 2007, half < € 5000) New framework law places more emphasis on ex
post control, reducing the FAOs role, but effect too early to say
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Ministry of Finance
Fiscal Audit Office
Tax and Payment
Office
Court of Accounts
Body (Ministry,
Region, etc)
Budget execution in Greece, 2008
3rd Party
* Excludes Salaries and Pensions
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Internal Control is a Key to Managing for Results - 1
Internal control is a broad term that covers rules and procedures for spending money, hiring staff, acquiring or selling assets, and maintaining records and data systems. It also covers management of risk and the role of internal auditors
Internal control is in contrast to external control, in which an agency must receive approval from a central agency before taking various actions that spend funds
Internal controls are the main instruments for assuring that government entities are capable of self management
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Internal Control is a Key to Managing for Results - 2
An entity is capable of self management when auditors find few material weaknesses in internal control. A material weakness is a practice or procedure that exposes the government to substantial risk or loss
In most advanced countries, auditors no longer audit specific transactions; instead they audit the internal control system, and “test” the system by reviewing a sample of transactions
The quality of internal control may be the most important guide in determining whether an agency can be prudently entrusted with broad discretion in running operations
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Using Performance Information to Improve Public Services
Activity Purpose Performance Measurement Provides information on expected performance; used to assess
results
Performance Targets Notifies managers and citizens of the specific outputs government entities are expected to produce
Performance Reports Compares actual and targeted performance, and analyzes significant variances
Performance Audits Independent assessment of the reliability and relevance of performance reports
Performance Benchmarks Provides basis for comparing performance to results achieved by most efficient producers
Performance Contracts Agreement between government and internal or external producers on cost and outputs
Performance Pay Links all or a portion of managers’ pay to results
Performance Budgeting Allocates resources on the basis of expected performance, with each increment of resources linked to an increment of output
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Implementing Performance-Based Budgeting (PBB) to Improve Public Services PBB allocates funds on the basis of actual or expected results
There is no standard definition of PBB: countries differ significantly in the way they define and implement it
Many countries define PBB as a system of budgeting that displays the outputs or services provided by each spending unit
This form of PBB does not require significant changes in budget practices or in public management
A few countries have PBB systems that link each increment in budget resources to an increment in output or to changes in outcomes
Implementing this type of PBB does require fundamental changes in budgeting and management
However, the closer PBB links resources and results, the greater the likelihood that it focuses on outputs rather than outcomes
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Managerial Conditions for Performance-Based Budgeting
Traditional View Budgeting “drives” management. If the budget is based on results, managers will guide their organization to improve performance
Contemporary View Budgeting is shaped by the managerial culture and context within which resources are allocated and services are provided. If managerial conditions discourage performance, efforts to base budgets on results will fail
Implication To succeed, performance-based budgeting must be part of a larger effort to restructure public management and to promote performance-based behavior in government organizations
The most avid users: line ministries
Activities Top two most common institutions responsible in OECD countries
Establishing a standard performance budgeting framework or drafting guidelines
Chief Executives (e.g. Presidents/Prime Ministers' offices) / CBAs
Setting performance targets Line ministries / agencies
Generating performance information Line ministries / agencies
Conducting evaluations Line ministries / agencies
Developing and maintaining ICT system for managing or supporting data and process needs for performance budgeting
CBAs / internal audit institutions
Allocation and/or reallocation of funds based explicitly on performance information (excluding Spending Reviews)
CBAs / line ministries
Preliminary results: not for citation
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Performance information is used for a multitude of purposes
Preliminary results: not for citation
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Time-series shown where available
0% 20% 40% 60%
Other
For eliminating programmes
For developing mngt reform proposals
Not used
To reduce spending
For setting allocations for programmes
For proposing new areas of spending
For setting allocations for Line Ministries/Agencies
For strategic planning/prioritisation
To increase spending
How is performance information generally used by line ministries in their negotiations with CBAs? Percentage of countries
2007 2011
Performance targets are set according to objectives and past performance
1
2
9
11
22
25
0 10 20 30
Other, please specify:
None
Relative to the performance of a similar programme
Relative to international benchmarks of similar programmes
Relative to the programme’s past performance
According to the performance objectives of the programme
How are performance targets set?
No. Of responding countries
Preliminary results: not for citation
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Traditional and PBB budget classification Table 1. Budget classification1 in Poland, 2010
Traditional budget structure
Example Performance-based budget structure
Example
Parts (84) Ministries, institutions, EU funds, local government grants, debt servicing
Functions (22) Main policy areas such as Function 3–Education, upbringing and care, or Function 6–State economic policy
Sections (33) Activities/areas such as industry, agriculture or transport
Tasks (145) Main programmes such as 4.4–Public debt management, or 6.1–Increase of competitiveness of the economy
Chapters (576) Sub-areas regarding sections such as industry, agriculture or transport
Sub-tasks (698) Sub-programmes such as 6.1.3–Creating conditions for increasing the innovativeness of enterprises
Paragraphs (229) Economic classifications such as wages or investment
Actions (<4 000) Sub-activities such as 6.1.3.1–Creating conditions for functioning of enterprises
1. 1. The horizontal rows of the table should not be read as though the levels of the traditional budget structure and the performance-based budget structure correspond.
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Classic issues facing the effort What institutional structure is necessary to implement
PBB? How do you ensure ownership? How does it add value? What technical issues need to be resolved? How long do you maintain piloting/ parallel systems? How do you ensure political support? What room is there for modification of the vision of the
PBB system?
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CASE: Chile and performance budgeting Goal of performance management in Chile:
effectiveness of policy-making and management create performance incentives for civil servants, to make the budget results-oriented
Overall the responsibility of Budget Directorate (DIPRES). It consists of five elements 1. the strategic framework (strategy statement, link to gov.
priorities) 2. performance indicators and performance targets (linked to
strategic products in strategy statement) 3. evaluation – a prominent feature (impact, logic, institutions) 4. the process for presenting and appraising new spending
proposals (template, assessment, intervention logic) 5. performance incentives
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Chile faces typical challenges in creating fiscal space with performance information
Some strategies suffer from output/process focus, are disconnected from operational plans, unclear link to budget structure.
Budgeting vs. management: while evaluations often do generate valuable management/program design changes, they relatively rarely impact on budget funding of programs
The program budget structure may not provide a sufficiently detailed classification of expenditure by objective. Some programs may need more focus on outputs and outcomes.
The budget classification is not integrated into the performance management framework; e.g. "strategic products" are not clearly linked to budgetary programs.
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Behavioral Conditions for Performance-Based Budgeting Traditional View
Changing the content and classification of information (by measuring outputs/outcomes and implementing a performance or program structure in budgeting) orients budgeting and management to a performance basis
Contemporary View
It is necessary to change the incentives/behavior of budget-makers and spenders. If these are not changed, adding information on outputs and results will not significantly change budget allocations
Two Approaches to Change Incentives/Behavior
Managerialism: Shift budgeting and management from control and compliance to performance and results by enabling managers to use judgment and flexibility within fixed budget constraints
Market: Establish internal markets within government to force managers to efficiently use resources and accomplish preset objectives
Performance budgeting in Sweden Experiences from Sweden points at the following: 1. Performance targets, indicators and appropriations are
directed to agencies, not programs. The link between tasks and organisations is thus vital if performance information is to be used.
2. It is advisable to keep the system of targets, objectives and evaluations as simple as possible. This limits the risk of information overload.
3. A performance system needs continual pruning, as there are always arguments for making it more detailed, but this will detract from its usefulness.
4. It is difficult but important to keep the information relevant for the political level
5. While performance information should be used selectively in the budget process, government performance needs a multi-year perspective.
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Measuring Outputs and Outcomes Producing results is dependent on reliable and timely information on
the volume and cost of the outputs or outcomes resulting from public expenditure
Output and outcome measures depend on different sources and types of information
Outputs depend on information that is internal to the spending entity: a well-run organization routinely compiles output-information in the course of operating its programs
Outcomes depend on information that is wholly or partly external to the spending entity. To obtain information on outcomes, an organization must measure what is happening outside its boundaries
Organizations have strong control of outputs they produce: They generally have weak control of the outcomes that result from their activities
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The Human Factor in Delivering Public Service The performance of government depends on the performance
of public employees and their commitment to serve the public
The public service ethic tends to be weak when public employees are low-paid, get their jobs through political connections, and regard their job as a right rather than an obligation
A weak public service ethic opens the door to corruption, “ghost workers” who often are absent (except on paydays), indifference to the quality of services, uncaring treatment of clients, and other deficiencies that retard performance
Motivating public employees who deal directly with the public (such as teachers, health professionals and tax officials) may be exceedingly difficult, but is essential to improving public service
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Accountability for Results Performance-based management and budgeting are based on the
principle that managers should be accountable for the results they produce – the volume and quality of services, the efficiency with which they are provided, and other dimensions of performance; as well as the impact on social and economic conditions
This expanded concept of accountability is often accompanied by administrative reforms that give managers greater discretion in managing their agencies and shift the focus of budgeting from inputs to outputs and outcomes
Difficult to hold managers accountable for results
One widely used method to strengthen accountability is to specify performance targets in advance, and to compare results against these targets. Another method is to give public employees bonuses for superior performance
1 1.5 2 2.5 3 3.5 4 4.5 5
Pay cut for head of programme/organisation
Programme transferred to other Ministry/Agency
Negative consequences for leaders' evaluations
Programme eliminated
More staff assigned to programme/organisation
New leadership brought in
Budget freezes
Budget increases
More training provided to staff assigned
Budget decreases
More intense monitoring in the future
Poor performance made public
No consequences
What happens when performance targets are not met? OECD average
2007 2011
There is not a straight-forward answer to poor performance
Never Occasionally Always
Preliminary results
27 Time-series shown where available, averages for the sample in each respective year.
… nor to good performance
1 1.5 2 2.5 3 3.5 4 4.5 5
Staff reduction/transfers
Requirements for reporting on performance reduced
Special recognition of senior civil servants responsible
Leadership/staff asked to train others
Senior Civil servants receive pay raise
Budget increase beyond regulara increase
Leadership moved to “re-create” good performance
Line Ministry/Department allowed to transfer remaining budget
Remaining budget allowed to be carried over to next FY
Positive results made public
No consequences
What happens when performance targets are met? OECD average
Never Occasionally Always
Preliminary results
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Accountability for Results, continued
Targets work best when they are realistic but challenging, provide for continuing improvement in performance, are transparent, and results are measured against them
Performance pay schemes rarely are effective when the bonuses are granted for individual performance; but more effective when group performance is rewarded
Some governments employ senior managers under term contracts that specify performance targets and expectations
In a few countries, auditors have assumed responsibility for reviewing statements of results issued by government agencies. But the principles for auditing results have not been standardized
Performance budgeting in France
Parliament evaluation (2009) concluded: 1. Indicators need to be more reliable and result from better
information systems 2. Better comparability between indicators through more
standardization 3. Better ownership of indicators and objectives in ministries 4. Often the performance based approach is disconnected from
operational management. 5. Stronger relationship between performance measurement
and the budgetary process (vs. Sweden!). The relationship should not be automatic, but performance should not be part of the process.
6. The involvement of Parliament is necessary to maintain the momentum
7. Managers have complained increased complexity, bureaucracy, lengthening of administrative channels and increase in payment delays.
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Accountability for Costs Costs are a measure of resources used and liabilities
incurred, in contrast to expenditures which measure payments
The accrual basis account for costs, the cash basis accounts for payments
Holding managers accountable for costs is a key feature of modern management systems
Accountability for costs often is impaired by the failure/inability of government to allocate various costs to the activities that incur them
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Accountability for Costs, continued
In many countries spending units are not charged for the pensions of civil servants or for use of IT systems
Simple allocation schemes, such as pro-rating building maintenance costs on the basis of the proportion of space occupied, provides a fuller account of resources used in government
Few governments have cost accounting systems that enable them to compute the unit costs of services. This inadequacy impedes governments from linking resources and results
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Cash Versus Accrual Accounting Expenditure and Payment
In cash accounting, expenditure is recorded when payment is made: in accrual accounting, it is recorded when liability in incurred
Many countries report finances on the accrual basis, but most still use the cash basis for budgeting
The accrual basis provides a more accurate account of financial condition, especially in countries that have significant arrears (unpaid bills) or long-term obligations for pensions and other benefits
The accrual basis may also provide stronger incentives for managers to control the costs they incur, for example, the cost of using government-provided offices
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Cash Versus Accrual Accounting, continued
Expenditure and Payment, continued
The accrual basis facilitates full costing of government services and operations by charging managers for payments made in a later fiscal period or by other administrative units
However, a country can reliably adopt the accrual basis only when it has a sound cash accounting system
“Cashbox” budgeting (the government pays bills based on the amount of cash on hand) is common in countries with fragile/volatile economies. It is not efficient, but enables the government to finance activities from one fiscal period or month to the next
Performance budgeting in the Netherlands 1. Detailed performance targets, monitoring, reporting 2. Experience of recent years: “information overload”
Too much data Too “industrial-scale”, “mechanistic”, “bureaucratic” Not used by parliamentarians or by public Not useful in identifying savings quickly
3. Now: More streamlined approach … 4. Note: the difficulty of introducing mechanisms and
processes in “good economic times”
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Performance budgeting in Austria, Ireland 1. Budgets restructured into “strategic programmes” -
linked to central plans, Statements of Strategy, Mission Statements
2. All information on plans, priorities, budgets in presented in one format – an integrated approach
3. Budgets show financial information and performance information together Ireland: “1-page rule” Austria: “3 to 5 key priorities” Avoids information overload
4. Also a good basis for Citizen Engagement E.g. “Ireland Stat” Compare approach used in Estonia – open data, used by
non-governmental organisations (NGOs) 36